Oprah Winfrey has been in the news a lot because of her generosity. She made news last year when she gave brand new Pontiac G6 cars, made and donated by General Motors
But the story continues. A week or so ago, to celebrate the fifth anniversary of her successful O magazine, Oprah gave 100 staffers $5,000 each. Perhaps remembering the car gifts, she intended these gifts to be tax-free. So she paid the staffers from a personal financial account, not from company coffers. She was viewing these gifts as ones that fall under the IRS's gift tax exclusion rules, which permit one to give up to $11,000 annually to someone (generally children or other loved ones), tax-free. (You may remember this rule as permitting gifts of $10,000 -- the limit has recently been raised.) These rules allow, for example, a set of parents to give up to $22,000 to each child each year -- a useful way to transfer assets as part of one's estate plan.
Does it work for Oprah, too? Many tax experts and aficionados say no. The main explanation is that though the money came from her personal account, it's still coming from the staffers' employer and should be treated as taxable compensation. I asked about this on our Tax Strategies discussion board (where you, too, can ask tax questions and get answers) and got the following responses.
ToroBravo2003 said: "From my vantage point, the only way that the bonuses can be tax-free is if Oprah pays the tax on behalf of the recipient. And even then, the tax she paid on behalf of them would be income to the recipient." Using a 20% tax rate as an example, he concluded that Oprah "would have to pay to the recipient $6,250 in order for the $5,000 to be tax-free to the recipient."
TMFPMarti mused that perhaps Oprah's financial advisors did have her "gross-up" the payments to amount to a $5,000 gift after taxes and that this tidbit just hasn't been reported in the press.
Irasmilo quoted CPA Brian Bivona, who discussed a similar case on another website: "Section 102 generally excludes gifts from income. On the other hand, section 102(c)(1) provides that the exclusion from income for gifts does NOT include amounts that are transferred by or for an employer to or for the benefit of an employee."
Kikraut agreed, saying, "I do know that if she is considered the owner/boss of O magazine, then it doesn't matter if she used personal funds or corporate funds. It would be impossible to convince the IRS or a judge that this was not some kind of bonus or compensation payment for work they have done in the past. It would definitely be considered part of compensation."
Wepatillo made a good point, noting that even if grossed up, the gifts should be reported on W-2 forms and would effectively increase the recipients' adjusted gross income, which influences other tax factors.
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Finally, here's a little more Oprah news -- 158 contemporary writers have made a public appeal to urge her to revive her famous book club. During the club's heyday, from 1996 to 2002, it featured a book per month, and most found their way to the bestseller list. If Oprah does indeed revive the club (she's now featuring classic books on a less regular basis), it will likely be great news for publishers and booksellers such as Barnes & Noble
Longtime Fool contributor Selena Maranjian owns shares of Time Warner and Amazon.com. The Motley Fool has a disclosure policy.
